The government is considering a proposal to make it mandatory for limited liability partnership (LLP) firms and state-run banks such as State Bank of India (SBI) to spend 2% of their net profits in corporate social responsibility (CSR) activities by making appropriate amendments in the existing laws, two officials aware of the matter said.

At present, CSR is mandatory for only those corporate entities that are incorporated under the Companies Act, 2013. LLPs and public sector banks (PSBs) are outside its preview as they are governed by different laws—the LLP Act, 2008, and the Banking Regulation Act, 1949.

But officials working in two different ministries said, requesting anonymity, that many big corporate entities take the LLP route to avoid spending on mandatory CSR and the new proposal is to provide a level playing field.

Section 135 of the Companies Act, 2013, makes it mandatory for every company to spend in every financial year at least 2% of its average net profits made during the three immediately preceding financial years on CSR activities, but the laws governing LLPs and PSBs are silent on this matter.

The ministry of corporate affairs (MCA), the department of financial services (DFS) and SBI did not respond to an email query on this matter. DFS is an arm of the finance ministry that regulates PSBs and state-run insurance companies such as Life Insurance Corporation of India (LIC).

“The existing provisions anyway exempt small firms from mandatory CSR, hence small LLPs should not worry. Formalisation of CSR laws for LLPs and PSBs to bring them on a par with other companies is desirable to create a level-playing field and plug any loophole that would push many profitable firms to take the LLP route,” one of the officials said.

Publicly available data suggests that of the total 12 PSBs in India, average profits of four PSBs are positive and amount to ₹15,732 crore; 2% of the amount would be at least ₹300 crore, said Saguna Sodhi, partner, Forensic & Integrity Services at consultancy firm EY.

According to official data, private sector HDFC Bank alone spent ₹535.31 crore in 2019-20 on CSR activities. It is ranked in the top four companies in terms of mandatory CSR spent that year after Reliance Industries Ltd ( ₹908.71 crore), Tata Consultancy Services Ltd ( ₹602 crore) and state-run Oil and Natural Gas Corporation ( ₹582.35 crore).

“With the growing importance of social responsibility in business, the potential of contribution by all profitable organisations, including PSBs and big LLPs, would be a positive step,” Sodhi said.

Section 135 of the Companies Act mandates that firms with a net worth of at least ₹500 crore or revenue of ₹1,000 crore or net profit of ₹5 crore should spend at least 2% of their net profit on sanitation, education, healthcare, poverty alleviation, and the environment, among others. Thus small firms do not come under the ambit of mandatory CSR.

A high-level committee on corporate social responsibility under the chairmanship of former corporate affairs secretary Injeti Srinivas in 2019 also recommended extending the scope of CSR applicability to LLPs and PSBs.

Alluding to this, Manu Varghese, partner at law firm, White & Brief Advocates & Solicitors, said, the Injeti Srinivas Committee also recommended extending the scope of CSR applicability to other entities such as LIC. “Since the government would be required to amend the specific regulations applicable to these entities, the same will take some time and we could be seeing progress in this regard in due course,” he said.

According to MCA, LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. In LLP, no partner is liable on account of the independent or un-authorised actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

A basic difference between an LLP and a joint stock company lies in that the internal governance structure of a company is regulated by statute (i.e. Companies Act, 1956) whereas for a LLP it would be by a contractual agreement between partners.